Tuesday, April 14, 2015

New Jersey Gov. Chris Christie, a probable candidate for president, put forward on Tuesday a set of ideas to reform the Social Security program. These include:

Allowing the Social Security retirement age to continue its gradual increase, from the current age of 66 today, to the already-legislated level of 67 in the year 2020s, and eventually on to 69 by 2034.

Instituting a mean-test under which retirees with non-Social Security incomes between $80,000 and $200,000 would gradually see their Social Security benefits eliminated; and

Eliminating the 12.4% Social Security payroll tax for individuals aged 62 and over.

My take: I’m okay on raising the retirement age along with longevity, though I didn’t include it in the plan I outlined in National Affairs. Also in National Affairs, I wrote against means-testing Social Security benefits. A means-test is an effective tax on work and saving, and those are things we want more of. I also don’t believe any politically-viable mean-test will produce significant savings, so I’m not sure it’s worth the effort. The payroll tax cut for older workers, however, is a good idea that I championed in the Wall Street Journal. Social Security pays very poor returns to workers on the cusp of retirement, but these individuals are very sensitive to changes in after-tax wages. Reducing the payroll tax could significantly increase labor supply from near-retirees, improving both the economy and their own retirement security.

2 comments:

"Social Security pays very poor returns to workers on the cusp of retirement"

If social security pays very little rate of return on the cusp of retirement what makes it able to pay a higher rate of return prior to retirement? The OASI tax is 10.6%. The targeted benefit is 41% of life time indexed wages. Looking at a historical US Treasury Rate of 4%, CPU of 2% and a person working from age 21 to age 67 and living the average life expectancy of 21 years at age 67, this worker would need to save 9.5% of wages each year assuming their wages increased at 4% a year as well. A lower wage growth would reduce the tax rate.

In addition 10% of those who work die prior to collecting from OASI. This does not reduce the tax rate by 10%, but it does reduce it. A higher rate of return let us say 5% reduces the tax rate to 6.7%.

Keep in mind that the higher wage workers have a targeted benefit of 21% which is a 3.42% tax rate. This makes up for the higher targeted benefit of 60% for low wage workers.

Raising the retirement age to age 69 would require an offsetting increase in life expectancy at age 69 of 5 years which means life expectancy at age 69 would have to be 25 years or more to not be anything but a benefit cut or tax increase.

Raising the retirement age according to cohort life tables would mean another 6% of beneficiaries at age 67 would not be alive at age 69, effectively reducing the beneficiary population by 6%. Surely this is nothing but a lottery, if you live long enough you might collect. Do we really want a lottery where 16% of those who pay into Social Security are statistically going to not collect because of death? 16% is like one in six people.

How much will these workers contribute to social security? Are you willing to risk $677,289 on the roll of a dice?

This is another attempt at kicking the can down the road. The can has so many dents in it, few can even recognize what its intended purpose was or more importantly how we came to this place in time.

Without fixing and addressing the root cause any change to social security will only mutate into a worse financial mess.

Andrew, you may have a typo : " A means-test is an effective tax on work and saving, and those are things we want more of. I also don’t believe any politically-viable mean-test will produce significant savings, so I’m not sure it’s worth the effort."

About me

I am a Resident Scholar at the American Enterprise Institute in Washington, where my work focuses on Social Security policy. Previously I held several positions within the Social Security Administration, including Deputy Commissioner for Policy and principal Deputy Commissioner. Prior to that I was a Social Security Analyst at the Cato Institute. In 2005 I worked on Social Security reform at the White House National Economic Council, and in 2001 I was on the staff of the President's Commission to Strengthen Social Security. My Bachelor's degree is from the Queen's University of Belfast, Northern Ireland. I have Master's degrees from Cambridge University and the University of London and a Ph.D. from the London School of Economics and Political Science. I can be contacted at andrew.biggs @ aei.org.